Lender consolidation looms as liquidity dries up

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There is an oncoming liquidity crisis that will force consolidation in the mortgage industry as margins tighten and funding sources dry up.

Mortgage banking is a cash-negative business and one of the few ways to make money for many companies is by selling whole loans along with the associated servicing rights to an aggregator, Stan Middleman, the president and CEO of Freedom Mortgage, said during a panel presentation at the Regional Conference of Mortgage Bankers Associations in Atlantic City, N.J.

While MSRs for sale are scarce and that is a positive for prices, some mortgage bankers are not seeing the benefit because that is being offset by lower gain-on-sale margins as the yield curve flattens.

Furthermore, Middleman is concerned that warehouse funding will start to dry up as the Federal Open Markets Committee continues to raise short-term rates, making that more expensive for lenders.

The options for independent mortgage bankers is to either shrink or combine with another company to gain the critical mass and have enough funds to operate.

"If you stay the same, you are out of business," Middleman said, adding it is hard to be an origination-only mortgage banker in the current environment.

Freedom is seeing its investments in a mortgage servicing platform payoff and providing liquidity for the company.

The liquidity crisis will come not from any drop off in warehouse funding availability but nonbank servicers unable to pay advances on Ginnie Mae loans, said Homebridge Financial Services CEO Peter Norden.

He is particularly worried about companies that recently became Ginnie Mae servicers and have not yet had to advance the principal and interest payments on a borrower in default. Those payments could total in the $25 million to $50 million a month range.

Furthermore, there has been a shift where independent mortgage bankers now service a significant number of loans in Ginnie Mae issuances.

"If one company defaults because of a lack of liquidity, it will have an affect on the entire industry because Ginnie Mae is going to come down on all of us" as a result, Norden said.

He agreed with Middleman that there will be fewer companies in the industry going forward. "Consolidation is going to be dramatic. It already has been dramatic," Norden said.

There are only eight to 10 independent mortgage bankers that he considered to have a strong balance sheet to be an active acquirer.

So for companies that have the capabilities, there is the opportunity to expand, he continued.

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M&A MSR Secondary market Warehouse lenders Freedom Mortgage Ginnie Mae